Negotiating the Commercial Lease
By Thomas Rose |
Mon, 3 Nov 2008
Some Key Issues from the Tenant's Perspective
Take this from someone who has read his share of commercial leases for clients, there is no standard form for a landlord's lease in commercial transactions in or around Houston, Harris County, Texas.
Know Your Landlord —
And every landlord (and leasing agent for the landlord) is different. Some are easy to deal with, others won't consider reasonable changes in the their documents (it's my way, or the highway new tenant). Some are motivated to lease-up their property and are willing to make contract concessions, others own properties that are in demand and have absolutely no incentive to make concessions. Some are up against quarterly performance reports and are willing to negotiate, while others face no time pressures or incentives and are unwilling to bargain. Some are incredibly sophisticated (perhaps owning properties throughout the United States, and with their own in-house legal departments), while others are embarking on their first rental property venture and have precious little landlord knowledge of commercial leasing in or around Houston, Texas.
Deal Points —
But most commercial leasing transactions will involve vigorous negotiations over some, and perhaps all, of the following lease covenants:
- who will be the parties bound by the lease;
- will there be any guarantors;
- what is an adequate description of the leased premises;
- who owns title to the entire property;
- what will be the term of the lease;
- will there be renewal options;
- how much is the rent;
- how is the rent payment calculated;
- what amounts are also due in addition to the rent payments;
- will the leased premises be modified;
- who will modify the space;
- who is responsible for abatement of hazardous substances discovered in or near the leased premises;
- who will pay the cost for abating these hazardous substances;
- may the leased premises be modified by the tenant after the commencement of the lease;
- what usage limitations are imposed against the leased premises;
- may the lease be assigned;
- may the leased premises be sub-leased;
- what, if any, services will be provided by the landlord during the lease term;
- what rights will the landlord's lender have over the leased premises if it forecloses on the landlord's property during the lease term;
- what rights will the tenant's lender have to place enforceable liens against the tenant's personal property and fixtures located within the leased premises;
- who is responsible for making repairs and maintaining the leased premises;
- who is responsible for making sure that the leased premises comply with applicable laws relating to public access;
- what insurance coverages and limits of insurance will be imposed on the tenant;
- are any insurance coverages and limits of insurance imposed on the landlord;
- what happens if the leased premises are destroyed by a casualty;
- what happens if the leased premises are not destroyed by a casualty, but other portions of the landlord's property have been destroyed by a casualty;
- what happens if the state, county or city announces plans to widen a road and acquire part of the landlord's property (for example, part of the parking lot), and access to the landlord's property and the leased premises are negatively impacted;
- and besides not paying rent, what are the listed events of default under the lease;
- and what are the landlord's remedies against the tenant for violations of the lease covenants.
Leases Are Complex —
The commercial leasing transaction can be one of the most complex contractual arrangements involving real property. While the list which appears above is not exhaustive, it does portray a fairly representative summary of the most frequently negotiated lease covenants from the tenant's perspective.
Adjust Your Expectations —
At the beginning of the leasing process, determine which category your landlord falls under (see the second paragraph in this article) — then adjust your expectations on securing lease concessions accordingly, and then contact a real estate attorney with background in representing tenant's in commercial lease negotiations.
Last Thought —
One last thought: Do not sign a preliminary "letter of intent" prepared by a leasing agent or broker involved in the early negotiations. Attempting to renegotiate the initial deal points struck without legal counsel is extremely difficult.
